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Vol. 14, No. 18 Week of May 03, 2009
Providing coverage of Alaska and northern Canada's oil and gas industry

FERC accepts 2007 rates

Orders refunds; sets rates; urges owners, shippers to settle remaining disputes

Rose Ragsdale

For Petroleum News

The Federal Energy Regulatory Commission has issued another major decision in a long-running dispute between owners of the trans-Alaska oil pipeline and unaffiliated shippers on the line that appears to move the case closer to final resolution.

This time, the commission took up the question of interstate shipping rates proposed by the pipeline’s carriers for 2007 and 2008 in compliance with its June 20, 2008, order, Opinion 502. That ruling endorsed an earlier administrative law judge ruling that established substantially lower rates for 2005 and 2006.

The FERC judge determined in May 2007 that the 2005 and 2006 tariffs should be based on the pipeline owners’ costs rather than a method that had been used to establish rates in a 1985 court settlement. The change resulted in a significant reduction in the tariffs. The judge also ordered limited refunds, which the commission upheld.

In its latest order, FERC concluded that the carriers’ proposed 2007 tariffs met the requirements of Opinion 502, but that rates sought by the carriers for 2008 in the compliance filings were still too high.

“2004” still best for refund floor

The Commission issued the order April 16, saying it would accept the proposed 2007 rates, but the 2008 proposed tariffs raised a number of issues of material fact and remained to be resolved in a public hearing before the Commission could rule in the matter. The five-member panel also established interim rates for 2008 and ordered the carriers — BP Pipelines (Alaska) Inc., ConocoPhillips Alaska, ExxonMobil Production Co., Unocal Pipeline Co. and Koch Pipelines (Alaska) LLC — to make refunds using the carriers’ 2004 filed rates as the appropriate refund floor because “the 2004 rates were the last clean rates.”

“The new just and reasonable rates for 2005 and 2006 were not established until November 20, 2008, the date of the Commission’s Order on Compliance and Rehearing of Opinion No. 502. Instead, the Commission ordered the TAPS Carriers to submit a compliance filing establishing interstate rates for 2007 and 2008 under the ratemaking principles established in Opinion No. 502.

“The final 2005 and 2006 rates may become the refund floor for new rate filings, but they would not apply to previously filed and accepted rates, even if subject to refund. This means that in the 2007 and 2008 rate proceedings, refunds can be no more than the difference between the proposed (TAPS Settlement Methodology) rate increase and the 2004 rates,” the Commission wrote.

This means the 2007 refunds will be for the entire amount of the difference between the originally filed settlement rate and the 2004 rates — $3.00-$3.20 per barrel — because the 2007 compliance filing rate (of $2.77 per barrel) falls below the 2004 refund floor, the commission concluded.

“However, the 2008 compliance filing rate of $3.45 per barrel is above the 2004 refund floor rate of $3.00-$3.20 per barrel, and so the 2004 refund floor will only come into play for the 2008 rate if the final just and reasonable rate determined in the hearing is below the refund floor,” the commission explained.

Issues must be resolved for 2008

The remaining issues to be resolved through hearing and settlement judge procedures for the 2008 rates include whether the return on equity and capital structure were properly determined; whether the test period or actual data should be used to calculate the rate; whether the dismantling, replacement and restoration expenses were improperly included in the rate; whether the correct rate base, operating expenses, and throughput were used in calculating the rate; and whether the rates improperly included imprudent costs related to the Strategic Reconfiguration Project.

The commission rejected a number of protests from the shippers, including requests from Anadarko Petroleum Corp. and Tesoro Petroleum Alaska for a technical conference and that the commission summarily rejected the carriers’ ROE calculation for 2008.

FERC also disagreed with the State of Alaska’s contention that the proposed 2007 and 2008 rates are unjustly discriminatory and unduly preferential in violation of the settlement that the carriers reached with the state in 1985. The commission also rejected several of the state’s arguments, including the state’s claim that the commission can order refunds below the refund floor pursuant to its ancillary powers and under authority granted by the Interstate Commerce Act.

Interim rates will help shippers

The commission said it established interim rates for 2008 out of equitable concern for the shippers, “who should not have to continue to pay a rate (i.e., the 2008 TSM rate) that the Commission found to be unjust and unreasonable in the December 29 Order.”

“Moreover, while there is no chance the final rate for 2008 will be higher than TAPS Carriers’ 2008 compliance filing rate, there is a possibility that the final rate will be lower than the 2008 compliance filing rate. Thus, the Commission accepts the 2008 compliance filing on an interim basis, subject to refund, until all challenges to the 2008 compliance filing have been resolved through the hearing and settlement procedures established herein.

“While the interim rates are subject to refund, the Commission orders the TAPS Carriers to issue preliminary refunds for 2008. Because the final rate for 2008 will not be higher than the 2008 compliance filing rate, there is no reason to wait until the end of the hearing to order initial refunds. Thus, the TAPS Carriers should issue preliminary refunds for 2008 in the amount of the difference between the 2008 TSM rate and the 2008 compliance filing rate,” the Commission wrote.

The commission also urged all parties in the case to make every effort to settle their remaining disputes before the “trial-type evidentiary hearing” it ordered is held. To aid that effort, the commission also directed that a settlement judge be appointed and gave the parties a month to make some progress toward settlement before the procedure for scheduling the hearing would move forward.

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FERC ruling refunds $440 million to state

An April 16 ruling by the Federal Energy Regulatory Commission will result in an estimated $440 million in additional oil production tax and royalty payments flowing to the State of Alaska later this year, according to state officials.

This is in addition to about $200 million in refunds awarded to the state under a previous commission ruling on protests of tariffs for 2005 and 2006, the officials said. They also noted that future trans-Alaska oil pipeline rates will have to comply with the FERC precedent.

Gov. Sarah Palin and Acting Atty. Gen. Rick Svobodny applauded the ruling.

“This is good news for Alaskans,” said Palin.“Pursuing TAPS tariff rate cases is not only important for the state treasury, but it also encourages new exploration in our oil and gas resources. Explorers consider fair and stable tariff rates a key factor in favor of investing time and effort. One of my most important promises to Alaskans is getting fair value for our resources, while also encouraging new resource development.”

Meanwhile, the carriers are appealing the FERC rulings to the United States Circuit Court of Appeals for the District of Columbia. Both the state and shipper Anadarko Petroleum Corp. are filing points on appeal that could result in even greater refunds, the state said.

—Rose Ragsdale